SW Richmond's  Instablog

It's finally occurred to me what is happening. 

The United States has committed sovereign default at least twice in the past 100 years; once in 1933 when Comrade Roosevelt seized gold from private hands and revalued it, and again in 1971 when Nixon ended convertibility.  Neither of these events were presented at the time as defaults.  Neither of them is taught academically as a default, yet that is exactly what they were.  Both events represented a significant devaluation of paper fiat "currency-thingies".  Both events represent a sovereign government, the United States federal government, breaking its word and revaluing its currency (downward, of course) for its own benefit. 

We are doing it again, right now, in plain sight.  The visible effects of this default will play out over the next few years, or perhaps all-at-once, but play out they shall.  And we are all so distracted by the idiotic inflation / deflation debate that we can't see it.  Other than default, how else can you characterize $24 Trillion in Fed and U.S. Treasury economic backstopping?  Remember, this is in the U.S. alone.  Had this backstopping, equivalent to 1.5 times U.S. GDP, not been set in place, the economy of the world would have collapsed.  Question: is this $24 Trillion in new currency, $24 Trillion in new debt, or something else?  Is it a promise?  Does it exist only in our minds, perhaps only in our hopes?  Is it a lie, or is it true?  Remember, had it not been done (so they say), we'd be riding bicycles and cooking rats over burning automobiles.  So does it exist, or doesn't it?

Remember, too, that all it has done is stem the hemorrhaging.  The balance sheets of the major banks, and of goodness knows how many smaller banks, are shredded.  It's pretty well established that banks are insolvent, right now.  The only reason they're still open is because the government "regulators" have allowed them to lie about their balance sheets.  They've done this for political reasons, not economic ones.  It's already been pointed out that Western banking "authorities" are doing exactly what they told those silly Asians not to do just a few years ago: hide the truth and hope to muddle through.  This time it's the Western authorities who are doing it, and they are doing so in an internationally cooperative manner; they're all in the same condition.

Governments have clearly demonstrated their willingness to use their legal monopoly, via the courts, to pick winners and losers.  They are perfectly willing to do whatever it takes to maintain this monopoly.  So, I wish to revisit the $24 Trillion.  Do any of you honestly believe they wouldn't print it if they had to?  Are we reduced to merely arguing whether or not it will be necessary?  In my opinion an argument can be made that they've already printed it, merely by suggesting they would do so if they had to. By their admission it was urgently necessary for them to announce its possible creation; again, does it exist or doesn't it?  If it exists, the currency has been debased; if it doesn't, then break out the bicycles.  Mass realization of this fact has been stalled by a massive misinformation campaign and massive vested interest in the status quo.  Which financial players (bankers, economists, accountants, politicians, central banks, etc) are willing to go to bat for reality?  The answer is the same as to the question of who is willing to step outside the two-party political paradigm: almost no one.  They all earn their living from the (old) system.  They can be counted on to continue supporting the lie.

So the people of the world wait patiently for reality to assert itself.  I have to ask, though, a very important question: If $24 Trillion is only sufficient to slow the crash, how much will be needed to start a "recovery" where jobs are created?  The $24 Trillion constitutes default.  The system failed and could only be rescued, and even then only partially, by a $24 Trillion promise against $800 Billion currency in circulation.  Oh, look, it's our old friend the 30:1 leverage ratio again.  Am I the only one who sees this for what it is?  We HAVE defaulted.  Math doesn't lie.  Where is the money going to come from to pay off all this debt?  Bernanke's computer mouse.

Meanwhile, blinded by B school conflation of money and credit, we sit around arguing about inflation or deflation. 

Disclosure: Long PMs and various dollar shorts, hedged by a substantial cash position.